How Credit Card Balances Affect Your Credit Score

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Understanding Credit Card Balances and Utilization Rates

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding your credit card balances and utilization rates. For any mortgage service needs, feel free to call us at 213-732-3074.

What Is a Credit Card Balance?

Your credit card balance can refer to either your card’s current balance or its statement balance.

Current balance: This is what you see when you log in to your account or check your balance on a mobile app. It includes the most recent statement balance plus any additional transactions, such as purchases, payments, and fees.

Statement balance: This is the balance that appears on the card’s most recent statement. It represents a snapshot of your card’s current balance at the end of a billing cycle and determines your monthly minimum payment.

The due date for your credit card bill is often about three weeks after a statement is created. If you pay your statement balance in full, you can avoid accruing interest on your purchases. However, if you pay less than the statement balance, the remaining balance and any new purchases will accrue interest.

What Is a Credit Utilization Rate?

A credit card’s credit utilization ratio, or rate, is the percentage of the card’s credit limit in use. For example, if a credit card has a $1,000 balance and a $5,000 limit, its utilization ratio is 20%.

To calculate the utilization ratio, divide the balance by the credit limit and multiply the result by 100 to get a percentage. In this case, 1,000 / 5,000 = 0.20, which becomes 20%.

Credit scoring models use this ratio as a factor in determining your credit score. Generally, a lower utilization rate is better for your scores. Credit card companies report your account’s information to the credit bureaus around the end of each billing cycle, which is why the balance on your credit report can differ from your current balance.

Why Your Credit Card Balance and Utilization Are Important

Your card’s balance and utilization are crucial because the balance represents what you owe, and the utilization can significantly impact your credit score.

If you’re carrying a credit card balance: Paying down the balance offers a double benefit. First, you’ll accrue less interest the faster you pay it off. Second, your credit score may increase as your balance drops.

If you pay your balance in full each month: You won’t accrue interest on your purchases. However, the statement balance is still reported to the credit bureaus, and you could have a high utilization rate. To lower your statement balance and the resulting utilization rate, consider paying down the balance before the end of the billing cycle.

Since a lower statement balance is better for your credit scores, you might consider paying off the balance in full every few weeks—or even more frequently. The best utilization rate is actually in the low single digits, such as 1%. A very low utilization ratio shows that you use and manage your card well, without overextending yourself.

Monitor Your Balances and Utilization

You can monitor your credit card balances during the month to figure out what will be reported to the bureaus. If you’re trying to optimize your utilization rate to improve your credit score, consider setting up automatic payments to pay down your balance before the end of each statement. Alternatively, set reminders for yourself to make payments before the end of each billing cycle.

Additionally, you can check your credit cards’ current utilization rates by reviewing your credit report. Your account also shows your overall utilization rate based on the balances and limits of all your revolving credit accounts, which can also be an important scoring factor. You can get tips for improving your score and track your score over time.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions.

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